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Achaian, Inc. v. Leemon Family LLC

Court of Chancery of Delaware
25 A.3d 800 (2011)
ELI5:

Rule of Law:

Under Delaware law, the specific provisions of a limited liability company (LLC) agreement governing the transfer of membership interests override the default rules of the Delaware LLC Act. An existing member who acquires another member's 'entire ownership interest' also acquires the associated voting rights without needing the other members' consent, unless the LLC agreement explicitly requires consent for such a transfer between existing members.


Facts:

  • Omniglow, LLC, a manufacturer of novelty items, was initially owned by three members: Leemon Family LLC held 50%, the Holland Trust held 30%, and Achaian, Inc. held 20%.
  • The Omniglow LLC Agreement defined a member's 'Interest' as the 'entire ownership interest' of the member in the company.
  • Section 7.1 of the agreement permitted a member to transfer all or any portion of its Interest to any person at any time.
  • Section 7.2 of the agreement stipulated that no 'Person' could be admitted as a member without the written consent of the existing members.
  • In 2008, Ira Leemon allegedly took sole control of Omniglow's management over the objections of both Holland and Achaian.
  • On January 25, 2010, the Holland Trust, wishing to exit the venture, executed a Purchase Agreement to transfer and assign its entire 30% Interest to Achaian.

Procedural Posture:

  • Achaian, Inc. filed a lawsuit against Leemon Family LLC in the Delaware Court of Chancery.
  • The complaint sought a declaratory judgment that Achaian held a 50% voting interest and an order for judicial dissolution of Omniglow, LLC due to a 50/50 deadlock in management.
  • Leemon Family LLC, the defendant, filed a motion to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted.
  • The Court of Chancery is now deciding Leemon's motion to dismiss.

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Issue:

Under an LLC agreement that permits a member to freely transfer their 'entire ownership interest' but requires the consent of all members for the admission of a new member, does the transfer of a membership interest from one existing member to another include the associated voting rights without the other members' consent?


Opinions:

Majority - Chancellor Strine

No. The transfer of a membership interest between existing members includes all associated rights, including voting rights, without requiring the consent of other members unless the LLC agreement specifies otherwise. The court reasoned that the Delaware LLC Act is an enabling statute whose default provisions cede to the specific terms of an LLC agreement. Here, the agreement's broad definition of 'Interest' as the 'entire ownership interest,' combined with the permissive transfer provision in § 7.1, allowed Holland to transfer all aspects of its membership, including voting rights, to Achaian. The court interpreted § 7.2, which requires consent for the admission of new members, as applying only to 'Persons' who are not already members of the LLC. This provision serves the common business purpose of allowing partners to choose their associates, but it does not grant existing members a veto over another member's acquisition of a larger stake. Because Achaian was already an admitted member, it did not need to be 'readmitted' with respect to the additional interest it acquired from Holland.



Analysis:

This decision reinforces the paramount importance of freedom of contract in the context of Delaware limited liability companies. It clarifies that statutory default rules, which separate economic rights from voting rights upon transfer, are easily displaced by the specific language of an LLC agreement. The ruling highlights the critical distinction between the admission of an outside party as a new member and the consolidation of interests among existing members. For future cases, this opinion serves as a strong precedent for interpreting LLC agreements as a whole, giving effect to each provision, and not imposing requirements, such as serial admissions, that are not explicitly stated in the text.

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